Financial independence is the state in which an individual or household is capable of surviving without the need of an employment. It is having control over your finances, cutting unnecessary expenses and increasing your income. This allows for free utilization and enjoyment of one’s time. Increasing one’s income requires investing in assets whether tangible or intangible. The most common way to increase income is through equity whether private (private businesses) or public (stock markets).
The difference between liabilities and assets is key in navigating one’s way to financial independence.
Liabilities are bondage
Any item that is costing you more than what you are gaining is a liability. Some items such as a car can become a liability for one but an asset for another. The only difference is how it is being utilized. A car being utilized just for personal use is a liability. It is a depreciating asset (meaning it loses value each year) with a high cost of maintenance.
A friend of mine said it best, in his own words, “if you can’t afford to maintain one don’t get one.” Liabilities are items set by businesses to ensure consistent returns for them. A car for example, will always need parts for repair. This is a recurring income for parts manufacturers. It needs fuel, hence another recurring income for oil producers. Each year fees and insurance need to be paid which are recurring income for the government coffers and insurance companies. Therefore you are in bondage as you end up consistently paying an expense.
Other than costing you money, liabilities can become a perpetual bondage if taken out on credit. Paying extra for it through credit is not financially prudent. One has to weigh the cost against the gains before taking out liabilities especially on credit. If it won’t increase your income or save you more time that can be used for something more productive, then it is not worth it. Convenience can sometimes be overrated.
Assets Bring Financial Independence
Assets are a good way to liberate your time from the bondage of debt or an uninspiring job. Assets will make you money while you sleep. Rich Dad Poor Dad author, Robert T. Kiyosaki offered the simplest definition of an asset, he said “An Asset is something that pays you whether you work or not“. An item can also be considered an asset if through ownership it will bring a future benefit. However, not all future benefits are financial. If a house is not giving you an income, is it an asset or a liability? In Kiyosaki’s strict definition, the house is not an asset.
However, owning a house regardless of income generation can still be considered an asset as you have the future benefit of not living on the street. Owning a second house however that is not generating income will become a liability. No two assets are equal and like everything in life risks are involved. For example owning real estate isn’t equal to owning a stock. The benefits, cost and ownership objectives are different. Real estate for example is not liquid compared to stocks and more cost are associated to it. But earnings can be consistent. Investment in assets is the best way to becoming financial independent.